Tax Tips
Raising Tax Relief for Higher Education - March 2010
Richard Scrivanich - Partner
The American opportunity tax credit is in effect for 2009 and 2010. For those years, most taxpayers who pay tuition and related expenses for post-high school education can claim a tax credit of up to $2,500. The tax credit will be equal to 100% of the first $2,000 of higher education expenses and 25% of the next $2,000 of those expenses. Outlays for course materials such as books are included among the costs eligible for the credit.
The American opportunity tax credit is actually an enhanced 2009-2010 substitute for the Hope education tax credit, which has been in effect for many years. While the Hope tax credit has maximum of $1,800 per year and is limited to the first two years of college, the two-year temporary American opportunity tax credit has a $2,500 annual maximum for expenses incurred in up to four years of college. Also, the Hope tax credit doesn't cover expenses for course materials.
Taxpayers who don't owe enough tax to take the full credit can get a refund of up to 40% of the credit for which they qualify.
Example: Laura Lancaster qualifies for a $2,500 American opportunity tax credit in 2009. However, Laura's federal income tax liability is only $1,500 this year. Thus, the American opportunity tax credit completely offsets her tax liability, with $1,000 left over. Laura will receive a $1,000 refund (40% of her $2,500 tax credit) from the IRS.
The American opportunity tax credit is subject to a phaseout for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).
If you're paying higher education bills in 2009, 2010, or both, you probably can choose among the American opportunity credit, the lifetime learning credit, and an above-in-the line tuition deduction. You'll typically enjoy the greatest tax benefit by selecting the American opportunity credit.
Laptop largesse
Another two-year tax break (2009 and 2010) applies to computers bought for higher education. This year and next, you can take tax-free withdrawals from 529 college savings plans for the purchase of computers and related equipment, as well as for Internet access for students and their families. In prior years (and in years after this provision expires), such outlays qualify for tax-free 529 plan withdrawals only if they're required by the college as a condition of enrollment or attendance.
Even before this new law was passed, the federal government had been trying to make 529 plans more user friendly. For example, the IRS issued Notice 2009-01, which permits investors in 529 plans to switch the investment options on their existing contributions twice each year. This notice applies only to 2009; otherwise, 529 account owners may switch investment options only once per year. In 2009, at least, 529 plan investors have more flexibility to help them cope with difficult market conditions.
If you have any questions regarding the above discussed topic or any other tax matter, please feel free to give me a call at (562) 698-9891.
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